Taxes You May Have to Pay as a Gringo in Mexico

There are some things about Mexican taxes you need to know if you are spending a lot of time anywhere in Mexico.

• If you spend over 183 days in Mexico you are considered a permanent resident under Mexican tax law and are liable for their income taxes on your worldwide income. The enforcement of this rule is lax in many areas of Mexico, but since Mr. Trump is causing Mexico problems they may start to enforce it.  Their tax rate is much higher than the USA.
• If you own property you rent out in Mexico even for a short time when you are no there, you owe VAT tax and income tax on your earnings. You are suppose to collect the VAT tax from the renter and pay income taxes on your rental income.  You can read more about the rules and how to pay these taxes if you do not have a Mexican tax ID number at: www.rentaltaxmexico.com
• If you sell real property in Mexico, it is the notary who handles the transfer that determines the amount of tax you pay on your gain.  How this is calculated does seem to vary.  If you are a permanent resident and you meet the criteria, and the property you are selling is your personal residence, that gain on sale may be exempt from tax.  See you Mexican accountant to learn the exact rules since the specifics as reported seem to be difficult to determine.
• If you have a commercial property or business, and wish to own or operate it in a Mexican Corporation, it is best to use the form of corporation that is a Sociedad de Responsibilidad Limitada (SRL), since you can make certain elections for US tax purposes that make it a flow through entity and thus you will not suffer double taxation on your US tax return and can claim tax credits for the income taxes it must pay in Mexico
• Email us if you need help with your US tax planning for Mexico.  ddnelson@gmail.com

Sale of Primary Residence in Mexico -US and Mexican Tax Rules

For US tax purposes, if you home in Mexico is your primary residence (this is subject to documentary proof on audit) for 2 out of the 5 past years (from date of sale) up to $500,000 in gain is not subject to taxes if you file a joint return, and $250,000 is tax free if you file as single.  Any gain above those amounts are subject to taxes at capital gains rates.  You can claim a credit for any Mexican capital gains taxes you paid on the sale against any US tax you pay as a result of the sale.

For Mexican taxes, to claim the unlimited exemption from taxes on the sale of your  personal residence you first must have lived as your primary residence it for five years prior to the date of sale and be a Mexican citizen or hold an FM2 visa.  You must also have documentary proof that it was your primary residence for that period of time. Such proof would include phone bills and utility bills; passports showing entry and exit dates from Mexico, etc.  You cannot have two primary residences for either Mexican or US tax purposes.

You cannot get the exclusion from Mexican tax if you only hold an FM3, even though you have lived in your home full time for the 5 years.  You must convince the Mexican Notary that your really did live in the property being sold as your primary residence for at least five years. The Notary makes the final decision whether to exempt you from taxes or not.

You should consult with a Mexican accountant, contadore (CPA) or tax abagado (attorney) if you wish to take advantage of the personal residence tax exemption to learn the steps required to qualify. Do not wait until the last minute when it is too late!

Therefore, it is possible to qualify for the gain exclusion on your US tax return though you may not qualify for Mexican tax purposes.